Is Canada next? Retiring Southwest CEO Gary Kelly discusses carrier's future

Southwest Airlines CEO Gary Kelly is on a farewell tour.

Flying to San Antonio to release a history book marking the airline's 50th year of operation. Speaking at a Wings Club luncheon in New York. It's his final holiday season as the airline's fourth CEO, and that makes for a meaningful period of reflection — and of looking forward.

That's because Kelly says he isn't really saying "goodbye." It's more of a "see you around."

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When Kelly steps back from the day-to-day management of the airline in February — handing the reigns to longtime Southwest executive Bob Jordan — he'll continue in his role as executive chair of the board of directors, a position that will see him leading the broader direction of the airline while continuing to go in and out of the airline's headquarters on a daily basis.

"I'll still be a part of the team, but I won't be a part of the problem solving on a day-to-day basis, which I really enjoy, so I'm going to miss that," Kelly said during an exclusive interview with TPG, conducted aboard a Southwest flight from Dallas to San Antonio, where Kelly was going to promote the book. "It's exciting for me, personally."

The location for this interview was fairly unique and presented interesting challenges — for instance, recording it was difficult due to the background noise — but it also presented a unique glimpse into the company which Kelly has helmed for nearly two decades.

One might expect the pilots and flight attendants working the big boss' flight to be nervous, or "by the book" precise.

But Kelly is a frequent flyer, traveling at least weekly from Southwest's home base at Dallas Love Field. This was a routine trip for the flight crew, and as Kelly walked through the airport and boarded the plane, he stopped to chat with the occasional flight attendant, pilot, gate agent, ramp worker — always on a first-name basis, remembering specific details about each ("how's your son doing," for instance).

That congeniality stands in stark contrast from an increased animosity that’s come to mark relations between the airline's labor unions and management, particularly during contract negotiations.

Despite that sometimes-acrimonious relationship on the collective level, however, on a personal scale employees at least seemed to appreciate Kelly, and vice versa.

"Without great people there's just no way you're going to have a sustainable business in the airline industry," Kelly said.

Southwest under Gary Kelly

Gary Kelly first joined Southwest in 1986 as a financial controller, quickly rising to be the airline's chief financial officer. In 2001, he was promoted to executive vice president before being appointed to the CEO role in 2004.

After 36 years at the airline, half of them as CEO, Kelly is wistful over his legacy, though happy to be stepping back on a high note.

"It's been a good run, even though we've had a lot of challenges over 18 years," he said. "I think the thing I'm most proud of is that we got through them without any furloughs, without any layoffs, without any pay cuts."

Indeed, Southwest is the only one of the big four U.S. carriers to have never furloughed an employee, although things came close in December 2020 as negotiations over hours and concessions stalled during a winter surge of COVID-19 cases. The job cuts were avoided in the end, but some pilots have told TPG that they still feel the never-furloughed recruiting benefit that Southwest once held has been diluted even by the threat last year.

The airline largely avoided layoffs and furloughs during the pandemic by relying on the federal Payroll Support Program, as well as enticing employees to take early retirements, buyouts, and voluntary leaves of absence.

It means that Gary Kelly can end his stewardship on a relatively high note, rather than seeing his legacy marred.

Under Kelly, Southwest underwent remarkable growth and hit numerous major milestones, although the core business model of low costs and fares, flight lines and focus cities rather than hubs and spokes, and fast aircraft turns and high utilization generally stayed in place.

Since Kelly took the captain's seat in 2004, Southwest acquired rival AirTran, allowing it to assimilate new markets and launch its first international service. The airline has gone from 58 cities served to 121, entered or grown in major big-city airports like Boston and Miami, overhauled the Rapid Rewards program, led the eventual gutting of the restrictive Wright Amendment, introduced the Boeing larger 737-800 and 737 MAX, navigated the airline through the process of beginning service to Hawaii and brought the airline into the global distribution systems that allow it to sell to a greater number of business travelers.

A steady transition to a familiar airline

Southwest may be replacing its head honcho. But don't expect a wild change in the airline's strategy. Far from it; the direction of Southwest won't change much, if at all, as Jordan comes to the helm. Southwest is counting on this stability, similar to the expected transition from retiring American Airlines CEO Doug Parker to replacement Robert Isom, and the previous succession of United CEO Scott Kirby over his predecessor Oscar Munoz.

It's part of the benefit of promoting from within, rather than hiring an outsider to be CEO.

Jordan, who has served in various roles at Southwest since 1988, most recently as executive vice president of corporate services, has effectively been in charge since September, Kelly said. Aligned on strategy, and long-familiar with the airline's plans and direction, Jordan will assume control but has the background knowledge and experience to keep the course steady, Kelly insisted.

"This is such a natural transition because he's been such a major contributor to our success and the strategy and the direction and everything," Kelly said at the Wings Club event last week.

Charting a course for the short-term

Notably, Jordan is not exactly a youthful newcomer — he's 61, just five years younger than Kelly. Still, he'll be responsible for steering the airline through the path that Kelly and the board have laid out for the 2020s, which has evolved significantly over the pandemic-defined first two years of the decade.

Part of that evolution comes from the fact that Southwest added 18 new markets to its route map in 2021, using the pandemic to accelerate what would have been at least a few years of growth.

"Especially as business travel begins to recover, and hopefully continues to trend up in 2022, we've got to restore frequencies in our traditional markets and provide that depth," Kelly said. "No. 1 for '22, it's really boring, but we need to restore our pre-pandemic route network, or at least get pretty close to it."

Consequently, do not expect Southwest to start service to many new cities in the next couple of years.

"The new market potential in the near term is probably really low," Kelly said. "No. 1, we need to restore our existing market frequencies. And No. 2, I'd rather not add more risk to the route network than what we already have."

Read more: 9 cool places you didn’t know you could fly on Southwest

Kelly reiterated what other Southwest executives have told TPG about the 18 new markets, saying they've all been fairly successful so far. Notably, however, he said that new markets tend to underperform established ones.

"They don't achieve system average fares and profits yet," he said.

"They're doing just fine considering they're brand new markets," he added, noting that it typically takes one to three years for new destinations to perform in line with the rest of the network.

"We're very patient, and as long as we see a market developing, it could take longer than that. It could take five years."

The real question is what happens after that.

"I hope we'll be able to continue the momentum we've built up over the past 30-plus years," Kelly said.

Also in the short-term, the airline plans to continue pushing aggressively to hire and expand its workforce, something that has remained a challenge for the entire airline industry and broader economy.

"We have fallen short of our hiring goals, through July, August," Kelly said. "Since then, we've been doing better."

Southwest had planned to hire about 5,000 employees this year, covering virtually every workgroup from ramp workers to customer service agents to pilots. The airline touted its hiring plan as one of its plans to avoid operational difficulties like it experienced in early October, when a series of factors including air traffic control issues, storms, and short-staffing for the airline's planned schedule led Southwest to cancel more than 1,800 flights.

"I think we're going to be close to that [hiring] goal," Kelly said. "However, having said that, it's still not like what it was."

Applicant pools are smaller, new hires decide to take different jobs at the last minute, and acceptance rates of job offers is lower.

"We have a lot more no-shows for classes and things like that than we're accustomed to," Kelly said. "So it's everything that you see in the broader economy."

Despite the looming industry-wide pilot shortage — and the unique challenges associated with hiring pilots — Kelly insisted that the airline has not had any particular issue hiring aviators.

"We've had more of a challenge in hiring flight instructors, interestingly enough, to upsize our hiring machine and our training machine, but we're making good progress on that front."

The longer-term vision for Southwest

With more than 15 years at the helm of Southwest Airlines, and the plans to continue as executive chairman, Kelly has both a sense of, and influence over, the airline's direction in the long-term.

According to Kelly, the airline has a punchlist of new projects and new markets.

Some items on the list are smaller — for instance, adding more U.S. cities to the network.

"If you go back a decade ago I was talking about having 150 destinations. That implies that mechanically, there's at least another 30ish, and I think it's probably more like 50, because a lot of these 18 [that Southwest added in 2021] weren't on our list 10 years ago."

Some of those 50 cities will be more continental U.S. markets. But others could be further afield.

"There are plenty of dots [on the map] left," he said. "Absolutely Canada, South America, more Caribbean destinations. I think we've pretty well covered Hawaii at this point in terms of number of destinations."

"Alaska, obviously, has potential," he added. "For the lower 48 [states], I think there are still more dots on the map there that we can consider."

Canada, long a subject of speculation for Southwest, has strong potential, Kelly said. However, adding it to the network would take some significant work.

Southwest is currently unable to process transactions made in foreign currency, Kelly said. To succeed in Canada, which Kelly believes would see a higher proportion of business travelers than many other markets, the airline would need to be able to sell tickets to Canada-originating passengers, meaning completing payment in foreign currency.

"That's a back-office capability that we've never invested in," Kelly said. "It's just been down on our priority list."

That hasn't impacted the expansion to international markets, Kelly said, because virtually all of the passengers flying on Southwest routes to Mexico and Central America are originating in the U.S. and purchasing their tickets in dollars.

Once that capability is added, Kelly said, there's potential for further expansions — such as code-shares with foreign airlines.

"In terms of us having long distance code-shares to Asia, parts of South America, Europe, Australia, and so-on, that foreign currency capability would be important," Kelly said. "The Mexican business market would be another example."

Kelly would not say precisely when the foreign currency capabilities and new markets would be added, but suggested it will likely occur in the foreseeable future.

"I would guess certainly within the 15-year time horizon," he said. "Whether that's three years, five years, seven years, that'll be up to Bob and our team to decide."

"It's just not in the cards for the next couple of years," he added. "It's just a matter of we have other things on the project list that carry higher importance."

On a similar line of thought, Kelly said he does not envision Southwest diversifying its fleet beyond the Boeing 737 platform anytime soon — another area of frequent speculation regarding the airline.

"It would be a work effort for us to bring in a different aircraft type," Kelly said. "We're perfectly capable of doing that, but it would distract us, in my opinion, from other things that I would rather be working on."

"Of course, [our fleet has] also got to meet the market needs, and everything I'm describing to you can be well-served with a 737," Kelly added. "North America, South America, it gives us great flexibility in terms of its capabilities."

Southwest signed its latest deal with Boeing in March of this year, adding 100 of the smallest variant of the Boeing workhorse, the 737 MAX 7, to its order book — a major vote of confidence following the nearly two-year grounding of the 737 MAX family following two fatal crashes. The grounding was lifted after Boeing redesigned the airplane's flight control computer.

At the time of the order, Southwest had been considering turning to the Airbus A220, but ultimately decided against it.

However, Kelly did not rule out a future move away from the Boeing narrow-body flagship.

"At some point one has to believe that we'll be flying something other than the 737, whether its a replacement or something bigger, or something smaller for that matter — you can tell we haven't decided yet."

"One of these days, maybe we're flying transpacific or transatlantic. I don't think the MAX is the right airplane for that, although at the margin the capabilities are there in certain segments," Kelly added. "I don't think it's anything that we have to be focused on right now, I think we've got enough opportunities to prosecute, to keep us busy for a long, long time."

Kelly also left the door open for a future change in the airline's business model, perhaps moving to a system involving assigned seats, or even incorporating some kind of premium seats or cabin.

"The wisdom of leadership is knowing what to keep and what to change, and when to do that," Kelly said. "I just want us to be open-minded to the fact that customers may demand that we make those changes."

In the meantime, though, Kelly said that there's no reason to introduce such changes.

"There's a risk with customers and making change, and every time we've done meaningful surveys, it's always come down in favor of continuing the open seating."

In terms of a premium class, he doesn't see that anytime soon either.

"What I would argue is that these kinds of things aren't that important to the vast majority of people, and if it were, they wouldn't be flying with us," Kelly said. "We're the No. 1 customer service airline every year, you know?"

But what is Southwest?

Southwest is an airline that can be difficult to categorize. It's not quite a full-service legacy carrier like the other three of the four major U.S. airlines — American, Delta and United. At the same time, it's difficult to call it a true "low-cost carrier," as the business model does not rely on charging for add-ons like checked bags, seat assignments, drinks, carry-on bags and more. But at the same time, it isn't a boutique carrier like JetBlue tries to be, being relatively more bare-bones.

So what is it?

"I think we're a category of one," Kelly said.

That used to be a challenge for the airline. In the late 2000s, for instance, as other carriers added bag fees and cut back on service in the midst of the Great Recession, Southwest saw its brand perception begin to fall, despite not making those changes, Kelly said.

"We got lumped in with everybody else," he said. "And so we had to have a major campaign."

Since then, things have changed.

"We don't find that we have to explain any longer," he said. "We command enough awareness with customers that they can identify who and what we are."

As Kelly prepares for his new role, he said he's proud of what Southwest has become under his watch, and excited to continue moving the airline in new directions.

"You don't dwell on what you're leaving behind. It's more what's in front of you."